Blog

Part 3 FASB ASU 2016-14 Reporting Requirements White Paper

Part 3 FASB ASU 2016-14 Reporting Requirements White Paper

We’re pleased to make available the third and final segment of the three-part white paper series on FASB ASU 2016-14:

Click here to access FASB ASU 2016-14 Reporting Requirements for Not-For-Profit Organizations White Paper Series Part 3 of 3.

This 8-page document is a project plan to help you and your organization focus on task oriented items detailed in all three phases: understanding, preparing, and implementing.

Haven’t accessed Part 1 or Part 2? No problem! Use the links below.

Part 1 – Understanding. Preparing. Implementing. FASB ASU 2016-14 Reporting Requirements White Paper

Part 2 – Understanding. Preparing. Implementing. FASB ASU 2016-14 Reporting Requirements White Paper

Financial Technologies Management works exclusively with nonprofits – providing affordable accounting services, software, and technology.

With the Financial Accounting Standards Board (FASB) issuing a new accounting standards update specifically for nonprofits (ASU 2016-14) to improve the current net asset classification requirements and the information presented in financial statements and notes about a nonprofit entity’s liquidity, financial performance, and cash flows, this is considered a big change.

In fact, this is the first major set of changes to nonprofit financial statement presentation standards since 1993.

Part 3 in our 3-Part White Paper Series on Understanding. Preparing. Implementing. FASB ASU 2016-14 Reporting Requirements for Not-For-Profit Organizations is an active project plan to help you and your organization focus on task-oriented items detailed in all 3 phases; understanding, preparing and implementing.

Feel free to edit and alter this to make it work for your unique nonprofit environment. Not every task will apply to your nonprofit, and there will probably be tasks you will need to add. Part 3 is meant to help guide you and your team as you embark on satisfying the new FASB ASU 2016-14 reporting requirements.

If you don’t want to go it alone – the team at FTM is here to help. We’ve been serving nonprofits exclusively since 1999. We work with nonprofit to select and implement leading nonprofit accounting solutions.

We also provide accounting services, including outsourced accounting, for organizations that understand that professional attention to the organization’s financial accounting is a prerequisite for proper stewardship.

Why Your Nonprofit Should Consider Using Nonprofit Accounting Software?

Why Your Nonprofit Should Consider Using Nonprofit Accounting Software?

Why Your Nonprofit Should Consider Using Nonprofit Accounting Software? – Your organization like every other nonprofit is feeling the pressure to deliver more transparency. The demand for more timely information is coming from a multitude of interested parties: board members, major donors, potential funders, and watch dog organizations.

Join us online Wednesday, August 29 11:30 – 1:00e
Click here to register

Why Your Nonprofit Should Consider Using Nonprofit Accounting Software?

The goal of transparency can’t be easily accomplished without sound nonprofit accounting software-financial reporting is the foundation upon which transparency is achieved.

As the number of nonprofits have proliferated, accounting software is more tailored and can help manage these complexities. But taking the time to select the right software for your nonprofit is critical.

Before your purchase, start with a software evaluation and assessment to see if you’re a good candidate for nonprofit accounting software. The software evaluation and assessment will review your current system to determine its level or utilization and functionality. It is probably a good idea to perform a software evaluation any time there is a major change within the organization either positive or negative.

We will review at least seven reasons Nonprofit’s should consider Nonprofit Accounting Software.

This webinar will help Executive Directors, Finance Directors, and finance staff to use and select the proper software for their organization.

Overlooked Benefits of Outsourcing Nonprofit Accounting

Overlooked Benefits of Outsourcing Nonprofit Accounting

Overlooked Benefits of Outsourcing Nonprofit Accounting

Has your organization ever looked at outsourcing all or a portion of its accounting? If not, it is because you’re not sure how the organization would benefit from this decision?

Since it is not a common practice for nonprofits to outsource its accounting, we will discuss the process and discuss the overlooked benefits of outsourcing your Nonprofit Accounting.

Join us online Wednesday, July 25 11:30 – 1:00e
Click here to register

In the nonprofit community, outsourcing typically means long-term delegation of key operation to outside experts. The accompanying expectation is improvement of the quality, strengthening effectiveness, and lowering or controlling costs.

A key difference in the nonprofit sector is not only controlling costs, but becoming a more effective organization.

Outsourcing accounting provides nonprofit organizations with a team of experts who have multiple client experiences which benefits its clients and the nonprofit organization’s it serves.

We will review six overlooked, and sometimes unknown, benefits of outsourcing nonprofit accounting.

We will answer this and more. We will review and provide you with a candid conversation of the benefits and disadvantages of outsourcing nonprofit accounting.

Immediately following the presentation on benefits of outsourcing nonprofit accounting, we will host a discussion on how to have the best possible accounting system.

FASB White Paper Part 2 Reporting Requirements for Not-for-Profits

FASB White Paper Part 2 Reporting Requirements for Not-for-Profits

As discussed in Part 1, by simplifying the financial statements, and by enhancing disclosures (footnotes), the FASB ASU 2016-14 changes will enable not-for-profit organizations to provide a more accurate and complete financial picture. The distinction between permanent restrictions and temporary restrictions had blurred over time by changes and as a result, had become less useful on the face of financial statements.

By reducing the number of classes of net assets that must be reported on the face of financial statements, especially the statement of activities, it will help reduce complexity, increase understandability, and enable greater use of multi-period comparative financial statements that can provide donors, grantors, creditors, and other stakeholders with information useful in identifying and assessing key trends.

Part 2 of Understanding. Preparing. Implementing. FASB ASU 2016-14 Reporting Requirements for Not-For-Profit Organizations will:

1) Analyze the changes in each financial statement. Helpful Hint: We recommend printing your audit statements to make it easier to compare and take notes.

2) Review typical chart of account changes needed to facilitate the new reporting.

3) Assess the accounting that may be needed in day-to-day and/or year-to-year processes.

4) Review the footnote changes that will be required. While many auditors prepare these for their clients, it’s smart to think them through and own the process.

Download the white paper

FASB proposes clarifications to accounting for grants and contributions

FASB proposes clarifications to accounting for grants and contributions

At a glance

A new FASB proposal will become effective in 2019 and will require nonprofits to account for grants from the government differently and may affect the timing of revenue and expense recognition for both recipients and funders of condition grants and gifts.

What happened?
On August 3, the FASB proposed rules that would require some grants received by not-for-profit entities (NFPs) to be accounted for under the contribution accounting model instead of the new revenue recognition standard. The proposed changes could also alter the timing of recognition of revenues or expenses for conditional grants and gifts under the contribution accounting model. While accounting for contributions primarily affects NFP entities, the proposed amendments would apply to all entities, including business entities that make contributions or grants.

Five-step approach for revenue recognition

The core principle of the new standard is that revenue recognition should “depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services” (ASC 606-10-05-3). To accomplish this objective, reporting entities are to apply a five-step approach:

  • Identify the contract with the customer.
  • Identify the performance obligations in the contract.
  • Determine the transaction price.
  • Allocate the transaction price to the performance obligations in the contract.
  • Recognize revenue when (or as) the entity satisfies a performance obligation.

Key provisions
The differentiator between a contribution and an exchange transaction is whether there has been an “exchange of commensurate value.” The exposure draft proposes enhanced guidance for determining when such an exchange has taken place between the parties to a grant or gift arrangement. In an exchange transaction accounted for under the new revenue recognition standard, reciprocal benefits flow directly between the parties to the arrangement. If benefits ultimately flow to the general public, rather than to the funder, the proposal would require that the arrangement be accounted for as a contribution, rather than as an exchange transaction. This might occur when, for example, a government agency uses a grant arrangement to outsource its own obligation to provide certain benefits to the public. Because NFPs and business entities generally account for federal grant awards as exchange transactions today, the proposal would be a significant change for NFPs. However, business entities would not be affected, because transfers of resources from governments to business entities are outside the scope of the contribution accounting guidance.

The proposal would shift revenue recognition for many grants received by NFPs from an exchange model to the model for “conditional contributions.” Consequently, the FASB also proposes changes that would clarify the accounting for conditional contributions.
Those changes would also affect donors and donees in gift transactions. When a gift or grant is conditional, neither the giver nor the receiver can recognize expense or revenue until the condition is satisfied. The proposal would redefine a “conditional” gift or grant as one that specifies a barrier that must be overcome to be entitled to the promised funds, along with a requirement that the funds be returned (or the promisor released from its obligation) if the barrier is not overcome. Unless a gift or grant includes these more restrictive provisions, gifts or grants deemed to be “conditional” today would no longer qualify. As a result, recipients would recognize contribution income, and grantors
or donors would recognize contribution expense, earlier than they do today.

Effective date
The proposed amendments would have the same effective date as the new revenue standard. For public business entities and conduit bond obligors with publicly-traded debt, the proposed rules would be effective for annual reporting periods beginning after December 15, 2017. Other entities would have an additional year.

Why is this important?
The proposed ASU would provide a more robust framework to determine when a transaction should be accounted for under the contribution accounting model or as an exchange transaction accounted for under other guidance (for example, ASC 606). In doing so, it seeks to harmonize the revenue recognition model used by NFPs for government grants, foundation grants, and charitable contributions. However, NFPs and
business entities could end up applying different revenue recognition models to similar grant transactions. The proposal also underscores the FASB’s intent that accounting for contributions should be consistent from the perspective of both the maker and the recipient of a contribution
or grant. Thus, the proposed changes for determining whether a contribution is conditional would apply equally to both resource providers and recipients.

Year End is the ideal time to document your financial policies and procedures

We have discovered that around fiscal year end might be the best time to document your financial policies and procedures.  We are usually preparing and implementing budgets and starting our audit preparation so we are usually in the planning and reviewing mode.

You can document your financial processes and see where you can make improvements.  You can look to see where you can implement new software and automate systems to reduce manual processes.

The written policies should document board and staff responsibilities and related segregation of duties.   You should consider what errors or irregularities could occur and what procedures would detect these errors or irregularities.  You should focus around cash disbursement, cash receipt, and payroll controls at a minimum.

Your financial policies and procedures should lay out clear expectations and encourage adherence.  Your financial policies and procedure manual should include audit, budget, and record retention policies.  Please contact us if we can help you document your financial polices and procedures.

Hiring an Accountant for your Nonprofit Isn’t Gettting Any Easier

Overall unemployment levels are historically low at 3 – 4% which is approaching full employment.   Robert Half reports that unemployment for accounts is actually below 2%.  As a result, hiring qualified talent is becoming more difficult if not impossible to achieve.  Nonprofits make double the number of errors compared to for profit businesses due to the complexity and under investing in the nonprofit accounting function.  Most nonprofits use accounting software that is not designed for nonprofit accounting.  This might be the perfect time to explore outsourcing a portion of the accounting depending on what types of activities you need internal staff to perform.

In the nonprofit community, outsourcing typically means long-term delegation of key operation to outside experts.  The accompanying expectation is improvement of the quality, strengthening effectiveness, and lowering or controlling costs.

A key difference in the nonprofit sector is not only controlling costs, but becoming a more effective organization.

Outsourcing accounting provides nonprofit organizations with a team of experts who have multiple client experiences which benefits its clients and the nonprofit organization’s it serves.  FTM has a team of nonprofit accounting experts to assist your organization with its accounting and finance function including hiring and training your internal staff.

You should look for the following in any accountant candidate that you are considering hiring for your Nonprofit:

  1. Your accountant should be able to keep your finances organized and under control.
  2. Your accountant should be able to enter your income, expenses, assets, and liabilities into accounting software.
  3.  Your accountant should understand the IRS requirements and generally accepted accounting practices to insure financial reports are properly prepared and accurate.
  4. Your accountant will make sure any employer taxes and tax filings are completed timely.
  5. Your accountant should be familiar with fund accounting and used fund accounting software.
  6. Your accountant should be familiar with reporting and be able to answer questions efficiently and effectively.
  7. Your accountant should be a resourceful problem solver.
  8. Your accountant should be self-motivated.

As difficult as it is to hire a good accountant, hiring an incompetent or incompatible person is even worse.    Competition for strong candidates can be challenging.  You can recruit applicants by asking us, your auditor, advertise in different places, and announce broadly.  You will want to assess the technical skills, communication skills, and timeliness of task completion of the applicants.    You will need to spend time on reference checks and be sure to ask about relevant nonprofit accounting experience and familiarity with your accounting software.  If cash flow is a significant problem in your organization, discuss it with the finalists.  When deciding salary, you might want to check with salary surveys or other organizations to see what they pay.

There are many right ways to hire a great accountant, and as you do so remember to balance your need for technical skills with someone who will help you strategize what are the best decisions for the organization.

Financial Health of the US Nonprofit Sector – Facts and Observations Report

We felt this report was important to share to the nonprofit sector and hope you find these observations helpful.  This report was provided by GuideStar, SeaChange Capital Partners, and Oliver Wyman.

Nonprofits play a critical social role in improving education, alleviating poverty, providing economic opportunities, supporting the health care system, and sustaining the arts. Their health is vital to our nation. So, when they face financial distress, it creates hardship for some of the most vulnerable and fragile segments of society. It also means that hardworking staff may lose paychecks or pensions and that trustees may be exposed to personal liability.

Our analysis shows just how fragile the nation’s nonprofits really are:

  • 7-8% are technically insolvent with liabilities exceeding assets
  • 30% face potential liquidity issues with minimal cash reserves and/or short-term assets less than short-term liabilities
  • 30% have lost money over the last three years
  • ~50% have less than one month of operating reserves

What can Funders, Regulators, and Policy-Makers Do?

A nonprofit’s ability to substantially improve its financial situation is often limited. Taking action to enhance risk management practices is important, but may not be enough. Improving the financial health of the nonprofit sector will require coordination between nonprofits, funders, regulators, and policy-makers.

The following ideas may help to improve financial health:

  1. Provide adequate funding for overhead
  2. Provide more flexible funding
  3. Encourage nonprofit restructurings, closures and/or mergers
  4. Create a rescue fund for strategically important nonprofit

We hope everyone will take this report seriously and see what we can all do to improve the financial health of the US Nonprofit Sector going forward.

How organizations can streamline the month-end close

This process is a time of stress and long hours for employees, despite technological improvements.

Companies have long sought ways to streamline processes so that accountants can spend less time collecting numbers and more time analyzing them for the organization’s benefit. Many nimble organizations are finding those time savings in the month-end close.

Closing the books quickly gives them the opportunity to take corrective action as soon as possible. This results in efficiencies and, in turn, cost savings. It also frees up the accounting department to devote more time to providing management with better information.

Despite improvements in efficiency from modern accounting systems, the month-end close process still causes considerable stress. A recent survey by software provider FloQast reported that 88% of accounting and finance professionals were negatively impacted by the pressure to close quickly.

Obstacles preventing a faster close process abound. Among them are the complexity of accounting standards and tax regulations; difficulty obtaining information from outside the accounting department; and working across incompatible legacy software platforms. Understaffed accounting teams, meanwhile, face a lack of time to design and implement new processes.

If management is comfortable with estimates, closing can be done quickly, perhaps in hours or days. But emphasizing speed over accuracy can compromise integrity.

Increasing speed and accuracy puts pressure on employees who may already be stressed. In the FloQast survey, 82% of accounting and finance professionals reported a negative personal impact from the close process. Finding the right balance between speed, accuracy, and employees’ needs is key.

Here are some best practices to smooth the process:

Develop and document standard procedures
Having well-documented procedures and checklists — are vital for speed and accuracy.

The order of prescribed closing procedures can be moved forward or backward depending on when information is available.

Keep improving your processes
One process per month might be broken into steps to find ways to improve the accuracy of estimates and to save time.  What do we want at the end?  What could we do at the beginning to get us there?

Cross-train the critical steps
Documented standard procedures and cross-training mean there’s no holdup in the process if a key employee is out sick or if that employee leaves the company.

Spread out the work
Many routine journal entries can be prepared well in advance. Some accrual or impairment calculations can be started midperiod and fine-tuned at the end of the period. Once the process becomes routine, staff will know what information is necessary and they can start preparing in advance of the month end.

Frequent reconciliations of key accounts — such as cash — reduce the work needed to close the books.

Consider materiality for estimates
In calculating accruals and estimates, keep materiality in mind. Finding a simple method for estimating accruals can save time if there’s no material difference from the exact amount.

Communicate the importance of a speedy close to the entire organization
Getting information from those outside of accounting can often be the biggest impediment to a speedy close. So developing relationships outside the finance and accounting departments is critical.

Automate as much as possible
Data integrity and speed improve as manual processes such as spreadsheets are replaced with automation. While spreadsheets are a useful tool, they can be prone to errors and have no means to track changes made to them.

The best path to an accurate and efficient close is for companies to follow the practices recommended for their software systems. Look to the system to see if it will solve the problem rather than just developing yet another spreadsheet. The extra effort required to become familiar with the advanced reporting capabilities of the company’s software system and to learn how to create a report that provides the information will likely pay off in the long run.

With automation, manual data entry is no longer needed. Rather than eliminating data-entry positions, it is better to retrain these individuals to perform higher-level skills such as research or variance analysis. These higher-level skills lead to better job satisfaction, which is crucial in a tight job market.

While retraining can require considerable time and resources, this investment can pay off by retaining the knowledge of those employees in the organization.

Source: Journal of Accountancy, How organizations can streamline the month-end close, March 1, 2018

 

About the author

Liz Farr (liz@farrcommunications.com) is a freelance writer based in Los Lunas, N.M. She also works part time as a tax manager at Pulakos CPAs in Albuquerque, N.M

 

Are you in Compliance with ASU 2016-4? Financial Statement Presentation of Not-for-Profit Entities

Update:

White Paper Available: “Understanding. Preparing. Implementing.  FASB ASU 2016-14 reporting requirements for Not-for-Profit Organizations

Overview

In November 2011, the Financial Accounting Standards Board (FASB) added a project to its agenda focusing on the financial reporting of not-for-profit (NFP) entities. The project has resulted in the issuance of Accounting Standards Update (ASU) No. 2016-14, Not-for-Profit Entities (Topic 958): Presentation of Financial Statements of Not-for-Profit Entities. The update strives to improve how a NFP organization classifies its net assets and provides information in its financial statements and notes about its financial performance, cash flows and liquidity.  We have summarized the full 270-page standard into this brief guide which outlines the primary changes to the financial statements of not-for-profit organizations.

Net Asset Classes

  • Replaces the current three net asset classes with the following two:
    • Net assets with donor restrictions
    • Net assets without donor restrictions
  • Removes hardline distinction between temporary and permanent restrictions
  • Enhances disclosure requirements:
    • Amounts and purposes of board-designated net assets
    • How restrictions affect the use of resources

Underwater Endowments

  • Presents deficits relative to original gift amounts of donor-restricted within the donor-imposed restrictions class of net assets
  • Enhances disclosure requirements:
    • Governing board’s policy related to appropriations from such funds
    • Any action taken during the period related to such funds
    • Original gift amount or level otherwise required to be maintained by the donor or law
    • Amount of the underwater endowments in the aggregate

Expiration of Restrictions – Long-lived Assets

  • Requires use of the “placed-in-service approach” for determination of when restrictions expire
  • No longer allows the recognition of the expiration of restrictions over the asset’s useful life

Statement of Cash Flows

  • May continue to elect either the direct or indirect method
  • When using the direct method, no longer requires the reconciliation of changes in net assets to cash flows from operating activities

Liquidity and Availability of Resources

  • Requires disclosure of qualitative information about how liquid resources are managed
  • Requires disclosure of quantitative information related to availability of financial assets to meet cash needs for general expenditures within one year, including impact of the following on financial assets:
    • Nature of the financial assets
    • External limits by donors, grantors, laws and contracts
    • Internal limits by the governing board

Investment Return

  • Requires external and direct internal investment expenses to be net against investment returns
  • Removes requirement to disclose amount of investment expenses net against investment returns
  • Clarifies what activities constitute direct internal investing activities:
    • Salaries and related expenses of staff responsible for the development and execution of investment strategy
    • Allocable costs associated with internal investment management and supervising, selecting, and monitoring of external investment management firms
  • Permits separate, appropriately labeled line items on the statement of activities for net investment return managed differently or derived from different sources
  • Eliminates the requirement to present investment return components for changes in endowment net assets

Reporting of Expenses

  • Requires all NFPs to report expenses by nature
  • Retains requirement to report expenses by function
  • Requires expense analysis by nature and function to be presented in one location, in either:
    • The statement of activities
    • A separate statement of expenses (similar to the statement of functional expenses)
    • A schedule in the notes
  • Enhances disclosures related to methods used to allocate costs among functions
  • Updates descriptions of management and general activities

Effective Date and Transition

  • Annual financial statements issued for fiscal years beginning after Dec. 15, 2017
  • Early application is permitted
  • Requires adoption on retrospective basis for all years presented, except for:
    • Analysis of expenses by nature and function
    • Disclosures related to liquidity and availability of resources

Don’t forget to take advantage of our free resource.   “Understanding. Preparing. Implementing.  FASB ASU 2016-14 reporting requirements for Not-for-Profit Organizations